Manufacturing Equipment

OTTAWA - The federal government should not further extend a temporary tax break that encourages the struggling manufacturing sector to invest in new productivity enhancing machinery and equipment, a business-backed think-tank says in a report that was immediately challenged by the industry itself.

It was right to allow manufacturers to writeoff such investments over a relatively short two-year period rather than over the full life of the investment, a tax incentive introduced in the 2007 federal budget that initially was to run for two years until the end of 2009, the Conference Board of Canada says. And it was right to extend that measure in this year’s federal budget for a third year to the end of 2010.

“Nevertheless, the conference board believes that this exceptional, tax-based assistance for investment should be allowed to lapse at the end of the planned period,” it adds in the analysis released Wednesday.Ditto for a parallel measure introduced by the Ontario government this year and that runs through 2010-11, which the board noted was also a welcome alignment of federal and provincial tax policy.

“It is appropriate for the federal and Ontario governments to help companies adjust to the extraordinary rise in the value of the dollar over the past six years,” said the board’s chief economist Glen Hodgson. “But making these measures permanent would distort investment toward the manufacturing sector and away from other sectors of the economy-which may lower Canada’s productivity growth in the long run.”

While the question for the two levels of government is whether the lifespan of the tax incentives gives manufacturers enough time to make the necessary investments to improve their productivity and competitiveness, the evidence to date suggests that “many manufacturers are taking advantage of the measure,” the report says.

Outside the auto sector, which is bearing the brunt of the adjustment to the strong dollar and the slump in the U.S. economy, investments in new machinery and equipment by other sectors, such as aerospace, food manufacturing and electronic equipment are projected to post double-digit growth this year and next, the board said.

“If governments wish to help specific manufacturing sectors and their employees to adjust to new economic realities, they should target any assistance to the particular circumstances of the sectors in question, not offer broad-brush solutions,” it said.

“Allowing the three-year window to close would also add credibility to government policy decisions aimed at aiding adjustment by businesses to very specific shocks,” it added.

The conference board’s recommendation, however, was flatly rejected as wrong headed by Jayson Myers, the president and chief economist of Canadian Manufacturers & Exporters, which sought to have the tax incentive extended further to five years.

“First of all, they are overestimating the strength of investment in the Canadian manufacturing sector … given the economic circumstances right now,” Myers said.

Many manufacturers’ bottom lines have been tightly squeezed by the strong dollar and the weakness in their largest export market, the U.S., and they haven’t had, and won’t have, the cash flow to take advantage of the tax incentive before it ends, said Myers.

Further, large capital investments often need several years of lead time, Myers said, suggesting the board’s analysis is the product of ivory tower thinking and not related to the real world of business.

Myers also challenged the think tank’s claim that if the tax incentive was long-term it would result in a shift in investment to that manufacturing from other sectors and hurt overall productivity.

“This is not about investing in manufacturing versus any other sector, it’s about investing in productive assets, in equipment that produces things of greater value,” Myers said. “And manufacturing equipment does that.”